A few days ago I accidentally ran into a white paper by a certain Christian B. Smart, PhD that had mysteriously made its way into my dropbox. It immediately grabbed my attention for several reasons. For one you simply cannot pass up a paper authored by someone with that name, although it may just be a pen name. More importantly it not only highlights a major flaw in fixed fractional position sizing, a method we use religiously here at Evil Speculator, but also promises to fix the problem. How could I resist? Of course, nothing in life is free and if you suspect that there may be a price to be paid for keeping up with theoretical compounding then I promise that you won’t be disappointed. More on that further below.
Now after familiarizing myself with the math I spent a bit of time running the numbers. The aim of this post is not to regurgitate Dr. Smart’s white paper but to share some rather interesting findings on how his approach affects a variety of trading systems. Before you continue reading I strongly recommend you read his paper first. No worries, it’s pretty light on the math and you’ll get away with basic algebra. But just to set the stage here’s the skinny:
- Fixed fractional position sizing is a popular and time tested method for money management. In the strategy a fixed percentage of equity (e.g. 1%) is risked per trade. We call that ‘R’ here at Evil Speculator and it refers to a unit of risk per campaign.
- Fixed-fractional money management is an intuitive method in which bet size increases when equity increases and bet size decreases when equity decreases. This form of money management is conservative in that it dramatically decreases risk of ruin.
- A concept related to money management is system expectancy. A system’s expectancy is the average, or expected, amount of money an investor expects to make per dollar risked. For example, a trading system with a winning percentage of 40%, whose average win is equal to twice the average loss, has an expectancy approximately equal to 0.40 * 2 – 0.60 = 0.80 – 0.60 = 0.20.
- Another key concept related to money management is that of compounding. Dr. Smith actually does not make mention of the word which surprised me a bit as the entire aim of his paper revolves around permitting effective compounding. If you’re unfamiliar with the concept of compounding then Google will be your best friend.
- With fixed fractional position sizing, any system does not achieve its expectancy (and thus its theoretical compounding) in the long run, but an amount less than the system expectancy. With a progressive betting system like fixed fractional sizing, in which returns are reinvested, the total return is the product of a series of numbers.
- The underperformance of fixed fractional position sizing has a basis in mathematics. The system expectancy is the system’s arithmetic mean. The average amount made per trade with fixed fractional position sizing is the system’s geometric mean. A well known inequality in mathematics states that the geometric mean is always less than or equal to its arithmetic mean. So in the long run, fixed fractional position sizing will never achieve system expectancy but will underperform.
So in a nutshell – in reality trading systems will always lag behind their theoretical expectancy. Over time the difference actually adds to quite a bit of lost profits:
This graph is taken off the white paper and shows a Monte Carlo simulation of an hypothetical system over 5000 trades. Clearly this should not be taken as a realistic projection of a real life system and only serves to demonstrate the concept. The take away message is this: Over the life time of a system there is an exponential delta between its theoretical and geometric compounding results.
Clearly missing out on ill-gotten gain is not a situation we take lightly here at Evil Speculator. So I sat down and actually produced a handy spreadsheet which I invite you all to download and have a go with on your own. I’m only mildly versed in Excel and if you are able to offer an improvement then please share it with the rest of us. Now as you know I have quite a few systems in the running and what I wanted to find out if and how they would be affected. The results quite frankly were a bit surprising.
You may recall that I am currently live testing Scalpius which despite its name is more of an intra day swing trading system. It is based on some of my work on volatility cycles and thus far it’s looking extremely promising. After painstakingly running the stats on 10 forex and futures symbols over the past five years I arrived at the following stats:
- Win/Loss Percentage: 1:1.11 – which is 47 to 53.
- Average Win: 1.23R
- Average Loss: 0.76R
- Expectancy: 0.18R
The stats slightly vary between the various symbols but not excessively. There is a common theme which Scott often refers to as a ‘forest of good numbers’ – a term I really like as it describes the process of testing for possible system form fitting. I would characterize Scalpius as having a small but consistent edge. It won’t make you rich overnight but if you keep it in the running and if you are able to grab good fills then it’s a very promising system. I am currently forward testing it over at Vankar and we are getting excellent fills – thus I’m cautiously optimistic.
Now if you ran Scalpius via 0.5% fixed fractional position sizing (FFPS) then you would theoretically bank a $147k profit over 1,000 campaigns based on a theoretical expectancy of 0.1815R. Yes, that is just a theoretical model – we need to be clear on that. In any case, when comparing that with the geometric expectancy of 0.1765R we arrive at geometric returns of $144k, the delta in US$ being $3,031. Not exactly chump change but given the overall context it represents only 2% of the theoretical returns, thus I’d submit it to the BFD department and move on.
However look at what happens when we increase the base risk percentage from 0.5% to 1.0%. Suddenly the numbers jump quite a bit. Obviously larger position sizing increased the compounding effect significantly but the delta between the arithmetic and geometric returns now amounts to 5.7%.
And in order to compensate for the loss in profits our position sizing has increased accordingly. If you look at the table in the center of the graph then you will find that the difference in position sizing has to increase alongside the base percentage. Whereas compensating expectancy loss at 0.5% only requires a small increase to 0.545% at a base of 1.0% you are now required to trade at 1.18% position sizes relative to your actual equity, as that percentage represents 1% of your ‘expected equity’.
But there’s more to this story yet. If you read the white paper then you remember that Dr. Smart used the standard hypothetical 40/60 – 2:1 system for his Monte Carlo simulation. I have used those stats in the graph above but have taken the liberty to reduce the risk percentage to 1.0%. Quickly apparent is that this system has a better expectancy of 0.2R which in turn changes the dynamics of the delta between arithmetic and geometric returns. We’re are banking a bit more here obviously but if you look at the table in the center you’ll see that we are also using larger adjusted position sizing. Now instead of $100k we are calculating at an expected equity of $120k. That’s a 20% increase and those numbers grow even more quickly as we are increasing the base percentage.
If you were to use 2% position sizing instead as per the white paper then you would have to calculate your positions via an expected equity of $140k. Also the delta between arithmetic and geometric returns has jumped to a whopping 35.3%! So clearly time is not the only factor that affects compounding. The higher the SQL of your system the larger the loss in expectancy. Which to most of us would be counter intuitive, but the numbers do not lie. Systems with a higher win/loss rate require increased position sizing in order to keep up with their theoretical expectancy.
Take Away Points
Given the above dynamics there are several considerations for system developers. The first one is whether or not compensating for geometric returns via an increase in position sizing is worth the added risk. The white paper makes it clear that the increase in position sizing does also increase maximum drawdowns.
I have not run the numbers on that end myself but judging by the paper’s graph it seems that it is roughly in sync with the increase in risk percentage. So if you’re trading at an 1.2% adjusted position size instead of 1% then it’s realistic to expect at minimum 24% maximum drawdowns instead of 20% at fixed fractional position sizing.
And given that the dynamics between theoretical and geometric returns are highly system specific answering the question of whether it is worth it depends, as always, on your personal risk profile. The real question then changes from whether or not to use expected fixed fractional position sizing (EFFPS) to how much compensation you are willing to allow for. And if nothing else we also need to embrace the fact that theoretical compounding becomes less efficient with increasing SQN. Systems with smaller but consistent edges (as for instance Scalpius) actually benefit quite bit more in comparison with high expectancy but low opportunity systems.
Meaning, if you could choose between a holy grail system which trades 200 times per year and produces 100R and one that takes 1000 entries to produce the same 100R then most of us would probably instinctively choose the former over the latter. The graph above shows such a hypothetical system – I have fiddled with the stats to produce almost exactly the theoretical returns of what Scalpius is promising at 1% position sizes. The delta between the theoretical and geometric returns is smaller, but look at the position sizing required to keep up! At a base of 1% we would have to use 1.91% to account for a 3.9% difference. Hardly worth the additional risk I would say and I’m pretty sure most of you would agree. Of course it
Finally the more risk you are willing to take trading any system the higher will be the additional risk incurred in order to keep up with theoretical compounding. Increasingly larger position sizing means that draw downs will be deeper and generally your system will exhibit higher standard deviation. That is never a benefit to any system but especially systems that thrive via large outliers will be the most negatively affected. Drawing from some of the lessons we’ve learned about equity curve filters I believe that low dependency low standard deviation systems would benefit the most (e.g. Scalpius) and high dependency high standard deviation systems benefit the least from EFFPS. Reason being that a high number of consecutive losers will quickly do you in if you’re trading 3%+ position sizes.
The final take away is that we as traders need to be careful what we wish for. At some point in our career all of us have been on a hunt for that holy grail system which prints money fast with a small amount of trades. Given the inherent power of compounding it remains that elusive path to quick riches which many of us hope for but very few ever achieve (and the one’s who do aren’t talking).
Over the years I however have slowly shifted away from that and am now more focused on creating systems which produce a small but reliable edge over time. And apparently when it comes to compounding it is these types of systems which require the least amount of risk when it comes to compensating for exponential lag due to the delta between theoretical expectancy and geometric expectancy. On paper lofty outlier systems may seem what you want but given enough opportunity (i.e. number of trades) ‘more realistic systems’ with a consistent edge may actually rival hypothetical ones over time courtesy of compounding. Quite some food for thought.
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So I found myself waking up last night and habitually reached for my iPad to catch up on emails and check my systems. Of course I wound up peeking at the blog as well and then for some reason decided to head over to the Slope to see what those bears were up to these days. I have to concede that I don’t visit there often as I truly have my hands full with running my own blog, maintaining various automated systems, coding and bug fixing, attending customer support duties – and then there of course are my own trading activities. Not a weekend goes by where I do not spend a minimum of five hours working on various projects behind the scenes or am preparing for the week to come.
That doesn’t leave much time for virtual socializing as I barely manage to catch up with the comment stream over here at the lair. But I always had a soft spot for the Slopers as I used to be one way back in the early days. And for some reason that sentiment appears to be mutual as much to my surprise Tim actually mentioned me in the very post I was reading. And yes in case you wonder, it was a positive plug – deservedly so or not.
However more importantly – some of the various points Tim was highlighting as part of a rather candid self analysis really chimed with me as they outlined the very challenges we have worked very hard to address here at Evil Speculator. And I dare say issues we eventually managed to overcome in time with a lot of effort. So if I may be so bold to offer some assistance here – by offering solutions that you hopefully will not wind up ignoring. To quote Winston Churchill’s commentary on man: “Man will occasionally stumble over the truth, but most of the time he just picks himself up and stumbles on.”
I have been a financial blogger for over six years now and believe me – I know how how most of you guys think and operate as I have literally seen thousands of people come and go. Personally I myself have walked through the shadow of the valley of death on several occasions – not only in the course of my own trading endeavors but also in my interactions with my readers, critics, and followers. Because it turns out that the pursuit of what actually works, i.e. what makes you a consistently profitable trader, is not just one of the most difficult personal challenges you may face in your life, but also happens to be very unpopular. Which really is an interesting contradiction if you happen to run a trading blog as a side business. Of course you want to turn retail rats into winning traders but while readers may expect excitement and get rich quick systems, you offer nothing but hard work, sacrifice, and the discipline to show up every day and do the same boring thing over and over again. Not exactly a tantalizing recipe in the face of an audience with the average attention span shorter than that of a goldfish.
The sad truth that has to precede the remainder of this article is that most of you will fail in becoming successful traders on a long term basis. Yes, I just said that, and if you disagree with that, well then please stop reading right now and just move on, because I cannot help you. Now Tim is way too kind and jovial to be telling you this but fortunately for you I am not. There is a reason why I’m operating as Evil Speculator and it’s not just due to an admittedly dark sense of humor. Which helps but the real challenge lies in overcoming your personal daemons and implementing positive habits whilst at the same time suppressing a large portion of your most deep rooted human instincts.
Now telling all this will accomplish exactly nothing as most of you will simply move on to the next post and forget all about it within a matter of days. So instead I am offering to work together with Tim Knight and the rest of the Slopers to produce your own system. One that has a long term edge – and most importantly you are comfortable trading on a daily basis. But first things first – let’s take it from the top – I am going to compile a list of the personal hurdles that Tim has presented and will address them one by one:
- Inability to implement knowledge into action and personal change.
- Personal beliefs.
- Directional bias.
- System and/or market hopping.
- Overcoming emotions.
- Quantitative vs. qualitative aspects of trading.
Inability to implement knowledge into action and personal change.
How many of you have more than three trading books in your bookshelf? How many own more than 10? How many have more than 20? Have you read them all? Why aren’t you trading any of those systems? Because they don’t work or because you are unable to follow them? Are you attending trading seminars? How much have you invested into all that? $500 – $1000 – $10,000 – more? I think you get where I’m going with all this. Unless you are new to the trading game odds have it that you have already absorbed a mountain of knowledge and trading related information and most likely that learning curve will continue as long as you follow the markets.
So the problem is not the quantity of information really – it’s being able to absorb useful information and to apply that to making successful trading decisions. In most cases less is actually more – back in 2012 I wrote a post on maintaining a strict information diet and I invite you all to read it. However whatever information you choose to absorb on a daily basis – ask yourself: Is this information useful to making successful trading decisions? If that answer is not a resounding yes then it’s nothing but noise that will distract you from your core mission (i.e. banking coin). So don’t make the mistake of equating information with knowledge.
Once you have found statistically verifiable information that you believe will lead to successful trading activities then you must take steps to implement them into your personal life. The fact is that over time you will come across many excellent systems that have a clear long term edge but which you are unable to pursue due to a variety of personal reasons. Perhaps the drawdown periods are too deep for you, maybe the entries happen too frequently during the day, the system doesn’t take enough trades for your taste (lack of opportunity), it works best in markets you are not comfortable trading (e.g. futures, forex, bonds), your account size does not permit proper position sizing. The list is long and it’s one only you can answer for yourself. Don’t expect to abide by even the best system in the world if the qualitative aspects of that system are incompatible with your personal beliefs, dispositions, and life style.
You probably expect me to say that your personal beliefs do not matter but actually it’s the other way around. They matter the most as you will not be able to pursue a system that is not in line with your personal beliefs about the market and how to take advantage of opportunities on an ongoing basis. And I’m not talking about drawing lines on charts either. Look, I really don’t care about what anyone paints on any chart – if I am not able to turn that information into winning trades it’s just noise to me.
Most retail traders are focused on market analysis while professional traders are focused on developing a low risk idea. To quote Van Tharp on the subject: Market analysis for most traders amounts to building a straw house. They collect data about the markets; they look at different patterns of charts and specific market indicators; and they even make predictions about the future direction of the market and then focus on trying to help those predictions come true. However they consider the probabilities of winning and losing or the amount that may be won or lost. In other words, what most traders do in terms of market analysis has nothing to do with making low risk trades. Hunters build straw houses, but that activity has nothing to do with catching prey.
So instead of ‘charting’ or ‘market analysis’ I simply think about developing low risk ideas. I start out with various ‘beliefs’ that I have developed over the years and then put them into context with the market. For instance I personally enjoy using Net-Lines, a price pattern technique I stole from Chris Carolan a few years ago. They work very well for me but they don’t mean zip to Scott – a fellow from Australia who I have been collaborating with over the past few years on automating various trading systems. Even if trading Net-Lines turns out to be a promising idea for taking entries Scott would never be able to trade them as the concept doesn’t chime with his particular market lens. We all have one by the way – a lens that is – a way of observing and processing information given to us on a chart. It’s all a matter of how we are wired mentally.
Some of us share a similar lens while others use one very alien to us. For instance 2sweeties from Italy (a contributor on the Slope) uses a sophisticated blend of statistics and fibbonaci retracements. Works very well for some – others will find it difficult to build a system around it. Most of you Slopers seem to enjoy bearish markets – I expect maybe also for a number of reasons beyond the scope of your trading activities, but also perhaps due to the inherent characteristics of bear markets. Meaning high volatility combined with directional trending tape. They are actually a lot more difficult to traverse then you would expect but that’s a different story. Bottom line is that you need to sit down and write down your personal beliefs about the market – where you believe opportunities can be found and how you plan to take advantage. Here’s an example using Net-Lines really quick off the cuff:
- I believe that Net-Lines produce statistically valid support and resistance levels.
- I believe that these levels grow exponentially weaker as time progresses.
- I believe that inverse entries prior to a breach and directional entries post breach should be taken.
- I believe that exits should be set at the opposing end of the trigger candle.
- I believe that entries should resolve into producing 1R within the following two candles or the odds for a reversal increase significantly.
- I believe that an accumulation of several Net-Lines of equal direction (i.e. sell or buy) increases significance.
And so on – I could probably list five six more and you may agree with some or none of them. But that’s not today’s exercise and it’s just an example and a first step in developing your own system. Once you have produced a set of beliefs about the market you start develop a system around it, which unfortunately is beyond the scope of today’s article. I merely attempted to demonstrate that personal beliefs are important and can actually be leveraged in developing a system that works for you personally. If there is any interest I would be happy to produce a pertinent series which covers this step by step. The offer stands Tim! 😉
You would be right in saying that it’s probably a bad thing. However it seems that many traders are unable to look in both directions and see the same amount of opportunities. Perhaps it’s because their mind is wired in a particular way – or it’s based on past experience. You can either fight it (my approach) or perhaps you can simply take advantage of it. Fine – you only like to take short trades – I bite! Then develop a system that only goes short – problem solved! What you should NOT ever do however is project your own directional biases onto any particular market. You want equities to crash and burn? That’s a rather perky disposition you got there tough guy – now see what happens over in reality. Mrs. Market is not kind to opinionated people – usually instant punishment is generously lavished.
System And/Or Market Hopping
Tim mentioned that he recently started trading binary options in collaboration with Dutch. Now there’s nothing wrong with exposing yourself to other markets and I encourage you look at all of them. However don’t expect any of them to be the answer to your personal limitations. They are not better or worse – simply different – that’s all. Forex trades differently than the futures – stocks are loosely tied to various market segment ETFs but the latter trade completely differently and have their advantages and disadvantages. Binary options sound like fun but require a win rate of over 50% for you to reach break/even. Futures offer leverage and require overnight margin – stock options are also highly leveraged but are what they call a wasting asset. All these different type of markets requires a different trading approach and it’s up to you to figure out which may work best for you. I personally like forex and the futures – but that’s me – I like things simple and I also enjoy trading 24×5.
The same applies to systems – many retail traders move from one system to the next – like nomads. They try their ‘luck’ with a promising one and at the first drawdown pull out and move on to the next system. Which is inherently the worst approach one could take as you keep taking drawdowns and then move on to another system, most likely during its earning period, which statistically speaking is prone to experience a drawdown in the near future.
Overcoming Emotions & Cognitive Biases
I have written about this subject in much detail in the past and if you’re familiar with my work you know that it’s an uphill battle. No matter how well you know yourself and how hard you work on it – you’re only one or two trades away from turning into an sobbing emotional wreck. It never ends and it’s a battle you will wage until the end of your days – and don’t believe for a minute that you are immune. The best thing you can do is to produce a system with iron clad rules and take yourself out of the equation as much as possible. Tim mentioned that he kept looking at gold and was happy that he ‘had dodged a bullet’.
That’s exactly the opposite of what you should be doing – sorry Tim. If you have a system then your entry happens in a very specific fashion and once you take that entry you already know when you will exit. I actually decided to not talk about stops anymore as they are an emotionally laden term. People equal them to ‘stop the bleeding’ or ‘stop the pain’. Which is another reason why I don’t talk about money or percentage even – I simply refer to ‘risk’ which is referred to as R – some trend traders call it N. You devote R (usually between 1% – 2% of your assets) to a position, set your stop (ahem) and then you walk away. Either it gets to target or it’ll exit at the point you require the campaign to end. If that sounds too complicated I can help – here’s a risk calculator for the futures and here’s one for you forex aficionados.
The rules are there to protect you from yourself. And that includes, me, you, Scott, Tim, Bill Dunn, Richard Dennis, William Eckhard, Ed Seykota, everyone. We are all flawed human beings and the less we are involved the better our systems are able to perform. In essence – give it enough time and we just mock it up.
Quantitative vs. Qualitative Aspects of Trading.
Nick Rage produced a great video that demonstrates how most people focus merely on the quantitative aspects of trading, meaning system development, campaign management, risk management, etc. As a matter of fact many of the views I present here are covered and I strongly suggest you watch it in its entirety. It also makes a point about trading systems on a long term basis which is another Achille’s heel of most retail traders.
This has turned into a rather lengthy post but believe me that I’ve only scratched the surface. Developing your system is actually the tiniest aspect of it all – the majority of your trading activities should actually revolve around managing yourself. Trading involves human performance and that performance can be objectively measured in terms of profit and loss. You cannot hide from your performance record, no matter how much you may want to mentally rationalize your losses. And since you are the most important factor in your performance, doesn’t it make sense to spend time analyzing yourself? The best traders do it constantly but subconsciously. So be one step ahead of everyone else and do it on a conscious level.
Let me conclude this with another Van Tharp quote (clearly I’m standing on the shoulders of giants today): Successful trading is 40% risk control and 60% self control. In turn the risk control portion is one half money management and one half market analysis (i.e. developing low risk ideas). Thus market analysis is only about 20% of successful trading. Yet most traders emphasize market analysis while avoiding self control and de-emphasizing risk control. To become successful, traders need to invert their priorities.
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Scott here. Judging by the emails Mole and I get there are a few of you trading Thor without a proper business plan to go with it.
Let’s be clear. Mole just sends you the signals, how you take them is always a matter for your system, and how position sizing limits work within your system needs to be defined right from the start. The problem for any system which trades more than one markets is correlation. Whatever you “think” the worst case correlation risk is on any given day, you can probably triple that.
Human beings are a smarter than usual species of apes. Monkey like banana, but monkey no count banana well. Always see potential banana and never see potential for banana to be taken away. Makes Scott ANGRY! Every setup look like many banana potential, even when setup marginal at best. Sometimes even see banana where no banana exist. Sometimes not see dangerous predator because too busy looking for banana. STUPID BANANA! But love banana so much, must keep chasing banana!
Technically any setup which is entered at roughly the same time will be correlated to some degree. (read that again it is very important) Every setup measured in USD (gold, copper, soybeans, bonds) is correlated in some degree. Every setup which is a “risk off” asset or “risk on” asset is correlated to some degree. Obviously all the JPY crosses are correlated, all the CAD crosses, etc. All the bonds, all the grains. But GBPJPY is correlated with ES futures, no doubt at all. So you need to apply some intelligent rules of your own design here.
One solution is to trade a tiny subset of markets. Some people take this to the extreme and trade only a single market. I’m a firm believer that this is suboptimal, however if you have different market beliefs (we after all only trade our beliefs) that may not be true for you. To be clear I would never take a potential setup simultaneously in Gold and Silver, ES and YM, AUDJPY and GBPJPY, etc. That should most definitely be explicitly in your rules.
HOWEVER. There is a big difference being stopped out on a long held winner (which is actually what you want) and stopped out day one for a big ass loss. Let’s say you have a winner running for a few weeks in Wheat and get a setup in the same direction in Corn. Would you take it? My personal rules tell me to take it. You might be uncomfortable with effectively pyramiding like that, or you might not. Your rules need to cover it.
Thor has an unusual characteristic in that around 50% of the 1R stopouts happen on the first day, and the big winners are often held for 3-4 weeks. So you accumulate positions like a junk hoarder. Right now in my main account I have 9 positions open, all risking 1.5% of equity, which is about normal. The more positions you have open the more opportunity for human error, market fuckery, mechanical problems where things trigger in a short space of time placing you under pressure. I have someone paid to check my work, which works very well and holds me accountable. This is my current open positions with open profit (in USD) and you can see of the 9 open positions 8 are in profit to some degree or other. This is a pretty typical day, equity was down about 1.1R overnight, a LOT of those positions still have the potential to fuck me over (stops not at breakeven)
What I suggest is to have a risk profile that suits YOU. If you are relatively risk averse I would suggest a limit of 4 POSITIONS WHERE THE STOP IS NOT AT BREAKEVEN OR BETTER. If you are trading high R values 3 positions might be appropriate. Possibly also a maximum % of account used in margin.
In my main account to calculate position sizing I also assume that any position with a stop not at breakeven will potentially stop me out, so I calculate the 1.5% based on equity less 1R for every position not at breakeven. This is sensible to ME, but may not work for you.
I trade 2 accounts, a real account with lots of money in it and a “cracker account” which I trade at high R value and every time I get a little money in I pull some out and live off it. I try and leave the cracker at between 40 and 50K and pull out 10K increments to live off. Except for paying taxes and the like I don’t really touch the big account, but I’ve learned (from Ivan actually) the value of taking profits out to “make it real” even though this is mathematically suboptimal. I very much like the cracker account/real account dichotemy. The cracker account is a small enough portion of my total equity that if it is totally wiped out it won’t make any difference to me, and I find it emotionally satisfying on a deep level to “eat what I kill” and pull $10K out now and again and treat myself to a nice holiday or something I want.
For instance in my cracker account which I trade for income at 4% R value (significant and real risk of ruin) I hit margin limits very quickly. I cherry pick the best setups and by necessity cannot take every setup. This is the current state of the account, which started trading Thor in August (switched from my previous systems) at $28000 and have pulled out $20,000 along the way. This is a 5 month return of 230% and an annualized return of over 500%. However even though this account is at fresh equity highs, it has endured peak/valley drawdowns of 30% – not for the feint hearted.
You can see it is using 47K out of 61K in available margin, and I have only 4 positions open. So one more position would max me out, and if those positions move against me (multiple positions have the annoying habit of moving in lockstep one way or the other) have me getting nasty margin call phone calls from the broker. So trading the cracker account for 4% R value involves me cherry picking the “best” setups – which brings in subjective elements which makes life hard/stressful/confusing. This is a difficult approach. Of COURSE it is difficult, shooting for over 400% / year SHOULD be difficult, right?
Anyway, I hope this gives you some ideas.